Whose loss is it anyway – the shareholder’s or the company’s?

Gary Itzikowitz (Itzikowitz) sought to recover from Absa Bank (Absa) the amount of the reduction in the value of his shareholding in Compass Projects (Pty) Ltd (Compass) – a company that held shares in Quantum Properties Group that, in turn, wholly owned A Million Up (Pty) Ltd (AMU): the company against which the alleged delict was committed.

Itzikowitz alleged that AMU’s demise and, in turn, the reduction in the value of his shareholding in Compass resulted from the alleged intentional, reckless or negligent conduct of Absa. Itzikowitz maintained that Absa owed a legal duty to act as a ‘reasonable banker’ and ‘not to take any decisions or to engage in any business conduct which could adversely affect the value of shares in AMU, or the value of any loan account in AMU in material respect’. The claim was thus a delictual claim for pure economic loss.

The court confirmed the Constitutional Court’s view in a different matter that conduct which caused pure economic loss is not prima facie wrongful – the plaintiff must be able to demonstrate a right or legally recognised interest was infringed. If no wrong was committed against the plaintiff there can be no claim. In approaching this enquiry, the court considered certain fundamental principles of company law, namely the nature of the company as a distinct legal personality, separate to that of its members. As such, the property of a company belongs to that company and not its shareholders. A shareholder’s right in relation to the company is simply a right to participate in such a company on the terms of the articles of association.

Due to these fundamental principles, the court emphasised the importance of determining whether the shareholder has a claim against the wrongdoer which is separate and distinct from any claim which the company may have against such wrongdoer. This determination turns on whether a wrong was committed against the shareholder, the company, or both the shareholder and the company. In essence, if no wrong was committed against the shareholder, then they are not entitled to recover damages from the wrongdoer. Thus the shareholder in the Itzikowitz matter could not go after Absa for the alleged wrongdoing.

Moreover, whether or not the wrongdoer acted intentionally or negligently is irrelevant for the purposes of such an enquiry.

Thus when a party breaches a legal duty owed exclusively to a company, which results in a loss to that company, only that company may sue in respect of that loss – as opposed to a shareholder who is merely invested in the company. Consequently, the shareholder cannot rely on a breach of a legal duty owed to the company in order to recover from a drop in the value of his shares.

Written by Hayley Laing and Maud Hill